India-Netherlands DTAA | AO Can't Use Reassessment To Cure Own Failure To Record On PE: Delhi High Court

The Delhi High Court has held that an Assessing Officer (AO) cannot invoke reassessment proceedings under Section 148 of the Income Tax Act merely to make up for his own failure to record a finding on the existence of a Permanent Establishment (PE) in India, after having conducted an inquiry into the issue during the original assessment.

The division bench of Justices Dinesh Mehta and Rajneesh Kumar Gupta made the observation while allowing a petition filed by Elsevier BV, a company incorporated and tax resident in the Netherlands, challenging reassessment proceedings initiated against it for Assessment Year 2016-17.

The Court noted that the Authority for Advance Rulings (AAR), while examining the taxability of receipts earned by Elsevier from Indian subscribers for e-books, e-journals, and e-articles, had held that the receipts did not constitute “royalty” under the India-Netherlands Double Taxation Avoidance Agreement (DTAA). The AAR had however, left it to the AO to examine whether Elsevier had a PE in India.

During the subsequent scrutiny assessment under Section 143(3), the AO conducted an inquiry into the PE issue. However, the assessment order did not expressly record a finding on whether Elsevier had a PE in India.

Thereafter, in 2023, the AO initiated proceedings under Sections 148A and 148, alleging that income chargeable to tax had escaped assessment.

The High Court found fault with this approach.

“He himself is to be thanked. He cannot undertake the exercise under Section 148 … for his own fault, folly or failure,” the Court observed, emphasising that allowing such reassessment would undermine the “basic fabric of tax adjudication viz, certainty and finality of the assessment proceedings.”

The Court further noted that the assessee had disclosed all relevant facts and there was no failure on its part to disclose material information. Consequently, the extended limitation period could not be invoked.

The Court also noted that the six-year period contemplated under Section 149 had expired on March 31, 2023, whereas the notice under Section 148 was issued on April 28, 2023.

As such, the Court quashed the reassessment notice on jurisdictional grounds.

For Petitioner: Senior Advocate Ajay Vohra with Advocates Aditya Vohra & Mr. Tanmay Dhakras

For Respondent: Puneet Rai, SSC with Ashvini Kumar & Rishabh Nangia, JSCs.